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What's at Stake in Managed Care Merger?

Anthem and WellPoint's union may face a fight against California.

Managed care is certainly a healthy business, as seen by several announcements Monday. Humana(NYSE:HUM) posted net income of $80.8 million in the second quarter, which was up from $69.3 million in the same period a year ago. There was also happy news for shareholders of Coventry(NYSE:CVH); the company generated profits of $84 million in the second quarter, compared with last year's $63.4 million.

But all was not hopeful. The $16 billion combination between managed-care powerhouses WellPoint(NYSE:WLP) and Anthem(NYSE:ATH) underwent serious complications.

John Garamendi, the California insurance commissioner, announced that he will fight to undo the massive merger. His role is to look out for the interests of California's millions of customers. According to Garamendi, the WellPoint/Anthem deal is a total rip-off and an example of rank greed.

He points to the billions in debt policyholders will be on the hook for. And, more glaring, he thinks executives of both WellPoint and Anthem could walk away with as much as $600 million in compensation.

No doubt, there is a great amount of politics at work -- which is the nature of a big state such as California. The current budgetary problems also add to the ferment.

And there's a lot at stake. The Anthem/WellPoint deal will create the largest managed care company: 26 million members and $36 billion in revenues.

However, Anthem and WellPoint have years of experience dealing with regulatory authorities -- especially in the context of acquisitions. These types of deals can easily take a year or more.

And a fight with California could also take a year. Though, judging by experience, it's probably something the companies are willing to do.